Why is it going to be a huge "swing election" in Iceland? Featured

Reykjavik, Iceland - April 25th -- Parliamentary elections are coming up in Iceland. The elections will be held on Saturday, April 27th. Recent polls show that the likely winners are The Independence Party and the Progressive Party, they have around 25% support each. Because of the 5% election threshold only around 40 - 45% support is needed to get a majority in parliament. There are 15 parties running in the elections.

The Progressive Party and the Independence Party were in government from 1995 - 2007. They led the country into a total collapse of the financial sector and a near sovereign default. The current center-left government has however received many compliments from abroad, from specialists and institutions (including the IMF), for their success in handling the crisis and rebuilding the country. So why is it that the Icelandic nation is supporting the Independence Party and the Progressive Party again?

The media

Soon after the financial crisis the new center-left government applied for the European Union. Interest groups were not happy with this, particularly those who own fish quota, since it is likely that the fish quota system in Iceland would change if Iceland would join the union. The fish quota is extremely valuable, and few families have been buying up quota so that the ownership of the quota is quite consolidated. These people want to protect their interests. The center-left government also promised to change the fish quota system altogether (and has been trying to do so), and to tax fisheries much more. The government did not manage to change the quota system during this term because of opposition from the Independence Party and the Progressive Party, and because of opposition from self interest groups like The Federation of Icelandic Fishing Vessel Owners (called LÍÚ).

One of the largest quota owners in Iceland, Guðbjörg Mattíasdóttir, bought a large media corporation shortly after the financial crisis. The corporation publishes a newspaper and runs the most popular news website in Iceland. David Oddsson was hired as the editor of the paper in 2009. He is the former prime minister for the Independence Party, from 1991 - 2004, and he was the governor of the central bank from 2005 - 2009. Since David was hired the paper has been considered highly biased, for example talking against the government. David is still the editor of the paper, and he is highly critical of the government. This seems to have affected the public opinion.

Icesave dispute

Another factor is the Icesave dispute. The dispute seriously harmed the government. The government always wanted to negotiate with the British and the Dutch and not go to court. The president twice sent Icesave laws for a referendum where they were dismissed by the nation. The final Icesave contract, sometimes called Icesave III, was considered by many to be a quite fair agreement, the government would have to pay some money to the British and the Dutch but the court uncertainty would have been avoided. Polls showed that a majority of the nation was going to pass this law in a referendum, but in the end they dismissed the law. All the parties that have been in government wanted to negotiate, when they were in government. The parties not in government were always against negotiations. The Independence Party was in government in 2008, and wanted to negotiate. Then in 2009 they were part of the opposition and wanted to go to court. But they supported Icesave III, and wanted to negotiate at that time even though they were not in government. The Left-Green Movement and the Social Democratic Alliance have been in government since 2009 and have wanted to negotiate since then. It so happens that the Progressive Party was never in government during this time, and has always been against the negotiations.

Many specialists and advisers to the government said that going to court was extremely risky, Iceland might end up paying large amounts in damages. This might even default the country was said. In a report from the IMF it was stated that if Iceland lost in court, the cost might be as high as 20% of GDP, which would likely mean an instant default. This is what the government was trying to prevent. Also, many Nordic countries and others wanted Iceland to negotiate in order for Iceland to receive emergency loans from them. So it seems Iceland had little choice but to negotiate. When the Icesave contracts were passed in parliament, Iceland got the emergency loans. But then the president refused to signed the law and sent them for a referendum where they were dismissed. So Iceland got the emergency loans, but ended up not negotiating. The minister of foreign affairs said that this way "Iceland got the best of both worlds". Because of the referendums the dispute landed before the EFTA court, where Iceland was cleared of all charges. "A huge surprise", said many foreign newspapers. So Iceland gambled, and won. But many people were unhappy with the government for trying to negotiate, and the Progressive Party gained a lot of support because of this.

The new constitution

Still another matter was the new constitution. The Social Democratic Alliance and the Left-Green Movement have been trying hard to pass a new constitution. A referendum was held regarding the new constitution, the result was that a majority of the nation supported this new constitution. The Independence Party has been fighting hard against the new constitution and in the end it was clear that the government would not be able to pass the constitutional bill. The Independence Party for example gave countless speeches to delay the process as much as they could. And they were successful. The Progressive Party was not supporting the constitutional bill. The government then decided to pass a law making it possible to work on and finish the constitution next term, without having new parliamentary elections as was required. Many people saw this as a betrayal and decided to blame the government for not passing the constitutional bill. But maybe people should just vote for the parties that want to finish the constitution next term, but the nation is not doing that (according to recent polls).

Household mortgages

Also a large factor is that many households are highly indebted. Many mortgages in Iceland are price indexed, and during the years after the financial collapse inflation was high. This has increased the principal of the price indexed mortgages through the indexation. Many households are unhappy with this. The inflation increase is mostly caused by the devaluation of the króna. The króna devalued around 50% after the collapse, so that it was necessary to put in place capital controls. This happened because of the financial collapse, because of the large outflow of money that happened following the crash. But many people have decided to blame this on the center left government. People are also saying that the government has not done enough to help indebted people. The government has however done many things, and would do much more next term because the government finances have been improving. The government has been very busy with saving the economy during the past four years. The government raised interest benefits, helped with putting in place a 110% rule, so that all debt above 110% of market value is forgiven among other things. This has helped many people, and the government has said that since the government finances are better now, so the government can do more for these households next term (if they get reelected).

Many foreign investors are locked with their money behind capital controls, in the Icelandic economy. Negotiations with them are underway, and it is expected that the government can benefit billions of EUR from these negotiations. For example because the government passed a law in 2011 putting all foreign assets of the defaulted Icelandic banks under the capital controls. The defaulted banks are mostly owned by foreign claim holders. This law strengthened Iceland negotiation position considerably, but the Independence Party was against this law, and the Progressive Party did not support it. The governor of the central bank has said that the claim holders of the fallen banks might have to write off 75% of their ISK claims.

The Progressive Party has promised to take this money and write off, flat, up to 20% of all price indexed household mortgages. The government however does not want to do that, but instead repay government debt, raise interest benefits among other things. The Central Bank of Iceland, and many of Iceland's top economists have said that these ideas from the Progressive Party are not good at all. They benefit the rich most, since they have the largest houses and the largest mortgages. The rich are however not in distress. This method would only help one-third of those in distress, while the largest share of the money goes to those who don't really need it. A recent report from the central bank shows this. Still the Progressive Party has gained support because of these ideas.

Rich interest groups in Iceland are extremely powerful and they try to affect the public opinion. For example through the paper Morgunbladid, which is owned by rich self interest groups. A large part of the nation always has voted for the Independence Party, and always will, or so it seems. Even though the parties policies increase inequality and mostly benefit the rich. For example the Independence Party wants to remove the progressive tax system, and start using a flat income tax. This would lower taxes on the rich, but increase taxes on low income families. They also want to lower taxes on fisheries etc.

Iceland is under a lot of influence from America. A lot more than the rest of the Nordic countries. Many Icelanders believe in deregulation, low taxes and small government, they want lower taxes on capital, firms and natural resources, even if it means that taxes on people are higher instead, or if it means much more austerity. Many want full market freedom and little government interference. Many Icelanders simply want to do whatever they think of, whenever they think of it.